Mixing Line In and Application audio into Skype Input

I wish to use Audio Hijack Pro to set up a podcast recording session in which I will converse with (and record) guests on a Skype call, and also include music/effects from an external application (say iTunes), which the Skype guests must be able to hear.

Here is what I have tried:

1. Install Soundflower through Install Extras in AHP.

2. Create a new session in AHP. Set the device to my microphone (Built-in Input: Line In), leave the Output device set to Default System Output (my headphones).

3. In the Effects tab for this session, add an Application Mixer effect. Set it to hijack audio from iTunes. Leave the Crossfade slider at its default (center) position. Click the Hijack button to begin hijacking audio from iTunes.

4. Still in the Effects tab, add an Auxiliary Device Output effect. Set its Device to Soundflower (2ch).

5. Click the main Hijack button for this session to begin hijacking the Line In input, and sending the mix to Soundflower.

6. To confirm the mix is working as desired, begin playing some music in iTunes. Click the Mute button for this session in AHP. Both Line In and iTunes audio are no longer heard through the default system output. Create a second session with input device Soundflower (2ch) and output Default System Output. Begin hijacking this second session. The mix of Line In and iTunes audio can again be heard, confirming that the desired audio is being piped through Soundflower (2ch). Delete this second session.

7. Open Skype. Open Skype Preferences. Under Audio, set Audio Input to Soundflower (2ch).

8. Call the user echo123 (Skype call testing service) in Skype to test the setup. If all works as planned, the Skype call testing service should be able to hear both the Line In audio and the music from iTunes.

Unfortunately, at Step 8, the Skype call testing service only seems to hear my Line In audio. The music from iTunes does not seem to be making it into Skype for some reason.

What am I doing wrong?